CHAPTER 1 - Terms

From the book organisational-abilities

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Leading and lagging indicators

To illustrate the difference between leading and lagging indicators, let’s look at a simple example:

My daughter is learning how to play the guitar.

The more she practices, the better she’ll get. There’s a link between how much practice she puts in and the desired outcome, in this case good guitar playing skills. Hours practiced is a leading indicator. It provides us with information we can use to predict the future outcome before it has materialised. More practice means better guitar playing.

Leading indicator: A measurement that provides information on what a situation or outcome may be in the future.

Notice that I’ve said ‘may’ rather than ‘will’. Since a leading indicator predicts the future, it guides us but that doesn’t mean it will always be accurate. Sticking to the example I’ve used, there’s a well known correlation between practice and success in most activities, which makes practice a good leading indicator to influence for musical success. But, if I were to pick up the same guitar, it’s possible that no amount of practice will make me good at it. Still, it’s the best way to have a shot at becoming a rockstar!

Other examples of leading indicators: the results of safety inspections as a leading indicator for safety in manufacturing companies; claims for unemployment benefit as a leading indicator for the economy; employee satisfaction as a leading indicator for staff retention; the smell coming from the kitchen as a leading indicator of a good meal. It’s not always straightforward to identify leading indicators, but when you do, you have a powerful lever for achieving your desired results.

Leading indicators:

Lagging indicators are much easier to measure, since they’re the result of past actions. This is generally an output.

Going back to the example I gave of my guitar playing daughter, the lagging indicator for her skill (the desired outcome) could be the number of tunes she can play, or number of errors in the tunes. Easy to measure, however harder to leverage and influence. If she knows that practice helps her to improve, and she works on that leading indicator (in this case practicing more), she knows it will improve her proficiency. In contrast, the lagging indicators show the results of past actions and as such are only useful in telling us how we’ve done.

Lagging indicator: A measurement that provides information on what a situation has been like in the past.

Focussing on lagging indicators can be counter productive.

“People do what you count, not necessarily what counts” [2].

If you focus on the indicator, it can lead to optimising for output over outcome. In our musical example, let’s say we focus on the lagging indicator ‘number of errors’. This could influence my daughter to pick easy, or short tunes which will indeed most likely lead to fewer errors. However, if our desired outcome is improved guitar skill then this is missing the point. A complicated tune with a few errors is surely demonstrating more skill than an easy song with none. In business this kind of focus on outputs over outcomes is common. It could be a development team hitting targets for the number of features delivered, whilst not delivering business results; or a manufacturing plant hitting targets for the number of units delivered, but causing the business to loose money with high levels of returns due to defects. That’s why we need to be really careful of what we measure.

Other examples of typical lagging indicators: number of sales, number of projects delivered, revenue, staff turnover.

Lagging indicators:

Why does this matter? Think of the leading indicators as the rudder of a ship. You use them to steer and change course. The lagging indicators should be the radar system and GPS. They show where you are. Used together in the right way they are important tools to achieve desired outcomes.

[1] Practice is closely related to guitar skill, but if I use quality of service in a restaurant as a leading indicator for a great meal, I may be disappointed (or surprised) more often than not when I get a bad meal with impeccable service, or vice versa.

[2] Seddon, John. I Want You to Cheat!: The Unreasonable Guide to Service and Quality in Organisation. Buckingham: Vanguard Press, 2007. p83

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